Energy Transfer Equity, L.P. (ETE) — Q2 2016 Form 10-Q
Entity note: The filing is for Energy Transfer Equity, L.P. (ETE), not an entity named Energy Transfer LP. It consolidates ETP, Sunoco LP and Lake Charles LNG. Reporting period ended June 30, 2016; financial amounts below are in millions unless stated otherwise.
Business context and reporting period
ETE is a master limited partnership whose principal cash flows come from its interests in ETP and Sunoco LP, including general partner interests and incentive distribution rights, and from Lake Charles LNG. Comparisons are affected by the transfer of retail operations from ETP to Sunoco LP and the change in ETP’s ownership accounting for Sunoco LP.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $9,344 | $11,594 | $17,026 | $21,974 |
| Operating income | $827 | $896 | $1,528 | $1,513 |
| Net income | $424 | $772 | $760 | $993 |
| Net income attributable to partners | $241 | $298 | $553 | $582 |
| Limited partner income per unit, diluted | $0.23 | $0.28 | $0.52 | $0.54 |
| Segment Adjusted EBITDA | $1,385 | $1,512 | $2,963 | $2,904 |
- Q2 revenue fell 19%; net income fell 45%, while partner-attributable income declined 19%. Six-month revenue decreased 23%, net income fell 23%, and partner-attributable income fell 5%.
- Operating margin was approximately 8.9% in Q2 2016 versus 7.7% in Q2 2015; net margin was approximately 4.5% versus 6.7%. For the six-month periods, operating margin was approximately 9.0% versus 6.9%, and net margin approximately 4.5% versus 4.5%.
- Segment Adjusted EBITDA declined 8% in Q2 but increased 2% for the first six months. This is a non-GAAP measure as defined by the partnership.
- Operating cash flow was $1,518 for the first six months, up from $1,113. Investing cash outflow was $3,775, chiefly reflecting $3,723 of capital expenditures. Financing cash inflow was $2,126. Cash declined to $475 from $606 at year-end 2015.
- At June 30, total debt carrying value was $39,514, including $1,013 current maturities; long-term debt and related-company notes totaled $38,608. Debt increased from $36,968 at December 31, 2015. Cash was $475. Current assets of $6,090 compared with current liabilities of $6,188, a current ratio of approximately 0.98.
- Partners’ capital was in deficit by $1,681; total equity was $22,997, largely reflecting noncontrolling interests.
Material changes versus prior comparable periods
- Lower consolidated revenue largely reflects lower product sales and the transfer of retail operations; revenue changes should not be read as a like-for-like volume comparison. Refined product and crude sales were notably lower, while gathering, transportation and other fees were broadly stable.
- ETP segment Adjusted EBITDA decreased $118 in Q2 and $72 for the six-month period. Lower Sunoco Logistics crude and NGL marketing results and weaker ETP midstream performance were partly offset by higher liquids transportation and services results and improved intrastate storage margins.
- Sunoco LP segment Adjusted EBITDA rose $22 in Q2 and $52 for the six-month period, primarily due to lower motor-fuel costs and more retail sites. Lake Charles LNG Adjusted EBITDA declined $5 in Q2 and $10 for the six-month period.
- Interest expense rose $42 in Q2 and $98 for the six-month period, mainly from Sunoco LP and Parent Company borrowings and notes. Interest-rate derivative losses were $81 in Q2 and $151 for the first half, versus gains in the comparable 2015 periods.
Outlook, management commentary, risks and unusual items
- WMB merger: ETE terminated its merger agreement with The Williams Companies after the required tax opinion was not delivered by June 28, 2016. WMB appealed the Delaware ruling. ETE said it would pursue counterclaims, including a potential $1.48 billion termination-fee claim if it prevails on an alleged breach; this amount was not recorded as income. Litigation could entail substantial costs and management distraction.
- Bakken projects: After quarter-end, ETP, Sunoco Logistics and Phillips 66 announced $2.5 billion of project-level financing expected to fund substantially all remaining project capital. ETP and Sunoco Logistics also agreed to sell a 36.75% interest for $2.0 billion, subject to closing conditions, while retaining a combined 38.25% interest.
- Capital spending: ETP forecast 2016 direct growth capital expenditures of $2.83–$2.99 billion and maintenance expenditures of $310–$345 million. Sunoco LP forecast growth spending of $380–$400 million and maintenance spending of $100–$110 million, excluding acquisitions. These are subsidiary forecasts, not ETE consolidated guidance.
- Distributions and financing: ETE declared a quarterly distribution of $0.285 per unit for Q2, or $1.14 annualized. In July, ETE agreed to relinquish incentive distributions over seven quarters, beginning with $75 million for Q2. Management noted that funding growth may involve borrowing, equity issuance, dropdown proceeds or asset monetizations. All credit agreement covenants were met at June 30; the Parent Company had $615 million available on its revolving facility.
- Risk exposure: $9.63 billion of floating-rate debt was outstanding; a hypothetical 100-basis-point increase could raise annual interest expense by up to $96 million. Commodity prices, spreads, demand, regulation, counterparty performance and capital-market access can affect results and liquidity.
- Contingencies and incidents: Environmental liabilities accrued were $365 at June 30. A June 26 subsurface hydrocarbon-and-water release and fire occurred at Lone Star’s South Terminal; there were no injuries and the cause and potential damages remained under investigation. MTBE litigation losses were considered reasonably possible, but excess losses could not be estimated. A FERC audit of Trunkline was ongoing. Other legal and regulatory matters are described in the filing; management said possible losses beyond recorded accruals could not currently be estimated.
- Management reported effective disclosure controls as of June 30, 2016, and no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Confirm the filing entity and security being analyzed: this 10-Q is for Energy Transfer Equity, L.P. (ETE).
- Track the Delaware appeal and any subsequent resolution of WMB’s claims, ETE’s counterclaims and the potential termination fee.
- Assess debt maturity, refinancing and interest-rate exposure, especially the rise in debt and the dependence on subsidiary distributions and external funding.
- Verify whether the Bakken financing and equity sale closed on the stated terms and how proceeds affected leverage and project funding.
- Monitor ETE’s incentive-distribution relinquishments, subsidiary cash generation and the sustainability of the $0.285 quarterly distribution.
- Follow developments and potential financial effects from the Mont Belvieu incident, MTBE litigation, environmental obligations and ongoing regulatory matters.